Taxation Laws Amendment Bill [B10-2009]: National Treasury & SA Revenue Services report back

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Finance Standing Committee

03 August 2009
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Chairperson expressed concerns that documents were handed out only at the meeting. The National Treasury and South African Revenue Service (SARS) representatives explained that they would respond to issues raised at a previous meeting, so the topics were not entirely new, and that issues of confidentiality prevented some documents from being made available earlier. The issues that were listed for a report back, following comments, related to capital gains tax and the raising of the primary residence exemption to R2.5 million. The phasing out of the deemed kilometre allowance, rather than its immediate repeal, was preferred. In respect of retirement lump sums, the main exemption would remain at R300 000 on retirement date, but a R30 000 provision to cover retrenchment had been introduced; this, however, would be deducted from the final exemption, not added to it. The “clean break” principle would apply to divorces, although there were still some exceptional cases where the financial situation had not been sorted out prior to the divorce decree. Minor beneficiary funds and the taxation of benefits taken out, were somewhat problematic as the administrative issues often outweighed the benefits, and it was felt that the Financial Services Board should regulate these. The concern was that double taxation should be avoided. Post-retirement medical aid benefits had also become problematic for many employers, who were tending to offer lump sums in lieu of continuing to provide the service. It was felt that this was too narrow an interpretation and that there must be more compromise and a review of the taxation provisions.

The question of dividend payments to shareholders was work in progress, that was affected by the changes to the company law, and was blurred by complex avoidance schemes, some of which were described. There was a need to recognise distinctions between large and small companies, and to maintain conformity with overseas tax regimes, to avoid any negative impact upon investment in local companies. Cross avoidance issues were also detailed. The depreciation allowances on improvements were intended to encourage developments in neglected urban areas, and the date of construction was to be the effective date. The distinction was drawn between this and allowances in respect of housing benefits, for instance those offered by mining companies, where the depreciation should relate to the mining operations and not to peripheral benefits. The aim of providing small businesses with tax relief, and the definition of “small” were described. It was furthermore the intention to regularise the position of dormant companies, and to distinguish between shelf and dormant companies, in order to relieve the clogging of the system, although the Companies and Intellectual Property Registration Office had not yet indicated how it would do so.

Members asked why there were proposals to change the capital gains tax on primary residences and asked for illustrative examples, including the position if improvements were made, and requested clarity on the retirement lump sums exemption, and on the provisions in respect of minor beneficiaries, asking also whether this was a move by the private sector. Questions of clarity were also posed in respect of carbon emission credits, noting that companies were continuing to pollute now, with adverse health consequences to the population. Members also questioned the mechanisms for monitoring compliance, the rationale behind the exemptions for depreciation, the incentives that were being offered to mining companies to provide housing, the need to strike a good balance on the costs of shelf companies, which were often purchased by small entrepreneurs, and the need to educate people about the costs involved in trusts and warehouse companies. Further questions related to spousal deductions, whether these applied to those in polygamous arrangements, whether there were statistics available, the “pay now, argue later” principle and whether there were many cases in which SARS had been incorrect. Members also queried what had become of the proposals in respect of disabilities, what was the current position with learner allowances, and the dispensation in regard to films. It was stressed in the responses that South Africa needed to offer regimes that were attractive to investors from other countries, and this required constant work to bring definitions in line with international practices, as well as recognising the business reasons for decisions or activities.

Meeting report

Taxation Laws Amendment Bills 2009: Report back by National Treasury (NT) and South African Revenue Service (SARS)
The Chairperson expressed concern that documents were handed out only at the meeting, expressing the view that at the very least, such documents should be made available to Members the previous day, to enable them to read and familiarise themselves with the contents and statistics, so that they could carry out their oversight more effectively.

Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, National Treasury, introduced his team, and noted that they would be able to assist him with answering any questions. This meeting would consider issues that had arisen from earlier meetings. Whilst he conceded that ideally the documentation should be made available to Members earlier, he nonetheless cautioned that there were issues of confidentiality, and that many documents were embargoed until commencement of the meeting. He furthermore reminded that the legislative process envisaged that the Minister of Finance announced the Budget proposals on Budget day, that there could not be consultation before the announcement, and that after the announcement of the Budget the draft Bill was tabled for presentations. This year there had been 53 presentations and inputs. The Departments would give serious attention to the presentations and inputs, and a response at a policy level would be given. The Minister was then further consulted and the date for a final meeting was determined. Following that, a response from the National Treasury and the staff of SARS was required. This was still awaited. All these aspects were to be incorporated in the Bill, together with any final changes. The whole process must be completed by 1 September 2009. He reminded the Members that at this stage every aspect and development was regarded as informal. Finally, he reminded Members that tax laws were complex and intricate, and impacted upon other legislation and programmes.

Mr Keith Engel, Chief Director: Legal Tax Design, National Treasury, then explained that the comment and submissions on the Draft Taxation Laws Amendment Bill (the Bill) had been overwhelming, and had impacted upon policy issues, with confusion about income and business tax.

Mr Engel firstly addressed the issue of capital gains tax and primary residence exemption. He pointed out that the original exemption had provided for a R1 500 000 exemption, which was designed to exempt the middle class from paying capital gains tax on a primary residence. However, there had been unintended consequences, since “gain” had not been defined with sufficient precision. A blanket R2 million exemption was proposed, which would exempt the low end of the wealthy class. This was done to simplify matters.

Mr Cecil Morden, Chief Director: Economics and Tax Analysis, National Treasury, dealt with the paragraph dealing with business travel vehicle allowances. The total removal of the “deemed kilometre” method in respect of the car allowance, proposed with effect from 1 March 2010, was too radical. It was agreed that it was more appropriate for this to be phased out, especially where car allowances were truly used for business purposes, and logs were maintained.

Mr Morden addressed the retirement lump sum benefit provisions. The intention of the policy was that there should be preservation of all benefits. There had been proposals to amend this provision in cases of retrenchment, but this would impact too heavily on the fiscus. By way of a compromise, a provision for R30 000 payout in cases of retrenchment had been introduced, but this was not in addition to the primary sum of R300 000 and would be subtracted from this sum if utilised prior to the date. In other words, the R300 000 provision would remain intact.

Mr Morden noted that in respect of divorce, the intention was to simplify the situation, and allow the “clean break’ principle to be carried out. There were exceptional cases, where the divorces may already have been granted but the financial provisions not completed, and these would need to be taken into account. It was felt that sufficient allowance was made for these cases.

Mr Morden noted that the provisions in respect of Minor Beneficiary Funds gave rise to problems, especially when these were held in trusts. National Treasury felt that these could be regulated by the Financial Services Board (FSB). However, from a tax perspective, the key problem was the levying of a transactional tax, and the concern was to adopt a regime that would prevents double taxation at both the inception and the exit from the scheme.

Mr Morden noted that post retirement medical aids provision had become problematic, since medical costs continuing long after retirement could be very costly, and such provisions already impacted heavily, or had the potential to do so, on many employers. Many prudent employers were trying to persuade employees to take money in lieu of continuing to provide medical cover post-retirement. It was felt that this was too narrow an interpretation and that there must be more compromise and a review of the taxation provisions.

Ms Sibhida asked what would be happening in regards to Capital Gains Tax, and why there was a proposal to change the situation.

Mr Engel responded that the definition of Capital Gains Tax would be reviewed in the following year.

Mr Tomasek gave an example of a primary residence, that might have been purchased in 2002 for R500 000, and sold in 2009 for R1.8 million. The gain (difference between purchase and selling price) was R1.3 million. Under the present provisions, there would be an exemption from CGT. This, however, was an easy illustration. If there had been additions and expansions to the primary residence, then there might be difficulties. If the combined sale price was R1.8 million, and the exemption was R2 million, then there was no problem. However, if the R500 000 property had been altered and improved and then sold for R2.5 million, then there seemed, on paper, to be a gain of R2 million, less the R1.5 million allowance, which would require payment of tax on R500 000 gain. The proposal was to simplify the tax in timing.

Ms Sibhida then asked what would be the position if a three-bedroom house was purchased for R500 000, then altered into a 6 bedroomed house, at a cost of R600 000.00, giving a total output by the purchaser of R1.1 million. If it was then sold for R2.5 million, the capital gains would be less than the exemption.

Mr Morden replied that the intention was to make it easier to calculate CGT and that both calculations should not be used, but rather only one.

The Chairperson asked for clarification of the retirement lump sums exemptions as set out on page 3.

Dr D George (DA) asked whether, if he lost his job, a taxpayer would receive a R30 000.00 exemption.

Mr Morden explained that the R30 000 could be claimed earlier, if need be, but this was not to be regarded as additional to the existing provision for a R300 000 exemption on retirement age.

Ms Sibhida asked for further clarity on the point regarding minor beneficiaries, which she thought might be problematic.

Mr Engel agreed that the position with minor beneficiaries was tricky. The intention was to help those under the age of 18 years, or those who were suffering from some disability. If the money paid into such benefit schemes was tax-free on payment, but was to be taxed when the benefit was taken, the cost of the administration and estimation of the tax often outweighed the benefit, since many of the amounts taken were small. If the system was changed so that the sums were taxed when paid into the schemes, this would be easier to administer, but there would then be considerable sums that would be exempt, which had in the past been paid by investors who had taken advantage of the tax-free situation. He said that National Treasury was looking again at the matter to work out an equitable approach. He suggested that the date on which this would come into effect was important, and this was currently stated as 1 March 2009.

Ms Sibhida expressed concern that this move was led by the private sector.

Mr Morden replied that the intention was to assist the beneficiaries to maximise their benefits from the funds. The intention was not to ease the position for the private sector.

Ms Sibidha asked for further explanations in regard to carbon emissions credits, as set out on page 9, saying that large companies were still continuing to cause air pollution.

Mr Morden noted that the Tradable Carbon Emissions Reduction Credit (CERs) were intended to be operative from 2012. Value Added Tax (VAT) was now no longer an issue. The intention was that companies must take steps to reduce carbon emissions, for the legacy of South Africa. He noted that the question of energy efficiency and environmental factors were set out on page 8. He said that incentives were being implemented to encourage energy efficiency. There was wide and ongoing consultation with other State departments and stakeholders.

Mr N Koornhof (COPE) asked why measurements in kW hours were still adhered to

Mr Morden replied that the intention was to convert to the more up to date measurements in time.

Mr Morden said that there was a great deal of inter departmental co-operation with regard to the environment, and the factors that influenced or impacted upon it. The broad issue of carbon emissions was being addressed continuously, and, he considered, quite effectively, and that further developments were expected within a year or two.

Ms Sibhidla said that whilst this was noted, she was concerned about the current deleterious results to people’s health.

Mr Morden assured her that there was widespread collaboration on this issue, which in itself was very complex, including other Parliamentary Committees

Continuation of briefing
Mr Engel then addressed the question of dividend payments to shareholders. He noted that the administration of this matter was a greater problem than the benefits. It was to be regarded as work in progress. It was also affected by the changes to the company law. He gave some illustrations of the mechanisms by which companies and shareholders attempted to avoid payment of tax on dividends, and stated that this required amendment of the applicable definitions, so that all would be starting from the same basis and would be taxed equitably. The various methods of avoiding tax included ”Stripping”, or calling distributions loans or distribution of cash or notes, rather than dividends. Sometimes dividends might be distributed by way of real estate or tangibles, or shares in subsidiaries. This was a very complex situation, requiring an even-handed and equitable approach. Furthermore, it must be recognised that there were distinctions between large and small companies, so that a “one-size fits all” approach was not appropriate. He further cautioned that in this area South Africa should try to maintain conformity with overseas tax regimes, to avoid any negative impact upon investment in local companies.

Mr Engel noted that a further concern related to telecommunications licence conversions, many of which had recently take place at the insistence of Independent Communications Authority of South Africa (ICASA).

Mr Engel then dealt with the provisions for the depreciation allowances on improvements, as listed on pages 21 and 22. He repeated that the intention of this provision was to encourage developments in neglected urban areas. In brief, the approach was that “the higher the risk, the higher the return.” As with much of tax law, there were differing interpretations and wishes. NT took the approach that the date of construction was the effective date, not the date of announcement of the programme or date of occupation. The aim was to assist Urban Development Zones (UDZs).

Mr Engel then turned to cross-issue avoidance, and remedying on unintended anomalies in the tax laws. This, once again, was a complex issue. He noted that essentially there were two commercial ways in which companies were avoiding tax. One was by not carrying out a straightforward commercial activity. The intention was to end the non-commercial approach whereby companies would issue to each other shares that had only a paper value.

Mr Tomasek returned to the issue of Capital Gains Tax (CGT). He noted that an opportunity had been afforded to regularize this aspect over more than two years. He added that the position had been exacerbated by the fact that, for their own reasons, many house owners had previously elected to have their personal residences registered not in their personal names, but rather through trusts or close corporations or companies, with appropriate regulatory consequences. Now they were raising objections, since the position had since altered, and the transfer of these properties was now attracting transfer duty, and also since the Companies and Intellectual Property Registration Office (CIPRO) had introduced an annual fee for all personal residence ownership other than in a personal name, which reduced many of the benefits that had previously applied to such registrations. This was the reason to allow the two-year period within which people could regularise the ownership details. He added that this was not intended to apply to residential accommodation owned for purposes other than personal use, such as a property that was let, and which would be regarded as a business use.

Mr Engle reminded Members that there was also an intention to provide small business with tax relief. For instance, registered legitimate small businesses could elect to pay a 10% tax rate. However, the definition of “small” was the operative factor. A 20-store chain of supermarkets, which was allegedly broken down to claim the tax relief for 20 businesses, would in fact be administered as a group. In attempting to secure advantages, people were often too clever for their own good. The intention was to keep the approach simple.

Mr Engel then turned to the difference between dormant companies and shelf companies. Certain providers of services offered “shelf companies” to those needing an “instant company”. These shelf companies would be companies or close corporations that had already been registered and merely needed to be purchased and their memorandum and articles updated or amended. When such a company was purchased, there must be compliance with SARS’s and other regulatory authorities’ requirements, depending upon the purpose of the company. This must be distinguished from the case where a previously active company became dormant. There were two categories of dormant companies. A company might be the registered owner of a property, but have no other trading activity. Alternatively, a company might have ceased to operate for its registered purpose, but remain on CIPRO’s registrations, and CIPRO was targeting the removal and de-registration of these companies, which were clogging the system. CIPRO had not yet provided a response as to how it intended to encourage the removal of dormant companies from the register.

Mr Engel moved to item 2.3.21: Mining Capital Expenditure. He noted that housing was an issue of national priority. However, although Government was encouraging the provision of housing by all sorts of entities, this could not be misused by distorting the definition of housing or mining capital expenditure. It was true that mines had community and labour concerns. However, they could not make use of the provisions regarding depreciation for capital expenditure unless this capital expenditure related to the actual mining operation, as distinct from any other interest. The same principles apply to mining rehabilitation schemes. It was submitted that expenses incurred in one area should not be confused or intermingled with other areas in order to claim a benefit exemption.

Mr Tomasek noted that certain submissions had been based on selective quotations from certain Tax Court decisions. He wondered about the ethics of such an approach, since legal professional ethics required that those making submissions should disclose both the arguments in favour of and opposed to their own submissions. He suggested that both the accounting and the tax regimes be aligned to encourage a more ethical approach.

The Chairperson noted that the session had been quite intense, and he commented on the substantial preparation towards developing these submissions.

Ms Dlamini-Dubazana said that she had not realised the immense complexity of tax, and she wondered what mechanisms there were for monitoring compliance.

Mr Engel informed her that SARS had tax collectors and business centres to monitor compliance.

Mr Tomasek submitted that the guideline for SARS was “at your service.” However, he pointed out that as yet dividend tax was not in operation and it depended upon the business’s operation. He stated that there were ongoing discussions with the Johannesburg Stock Exchange (JSE), and that SARS did not have a satellite office in the JSE, but a large business centre. Dividend tax, he submitted, was a very complex issue and above all the status of the recipient of a dividend was relevant, hence the need to establish a paper trail, so that SARS could pick up and check the trail of the dividend

Mr I Momoniat added that dividend tax was regarded as complex, and fell under a part of corporate tax.

Ms Dlamini-Dubazana questioned the rationale behind the exemptions for depreciation, and the references to housing. She noted that to her understanding, the provisions of the old Act had incentivised provision of housing at 10% but that was not applicable now

Mr Engel noted that it was a policy to provide incentives to employers, such as mining companies, to provide housing for their employees, but that this should be purchasable housing, not rented housing, and so there was a less favourable depreciation regime if the employer opted to provide rented accommodation.

Mr Morden added that the question of housing, while important, was broken down into three conditions. This was to be regarded as distinct from UDZs exemptions,
which seemed to be working well and achieving the aims. It was not intended for individual relief, or for leased property. If an employer wanted tax relief on this basis, the housing scheme must be a complete scheme, and the relief was applied to the employer, not the recipient of the house.

Mr Engel said that the tax law was already complex, but was made more so to make it apply to some people who tried to think up ways to avoid tax. The intention of the mining depreciation allowances was to apply depreciation to the individual mine rather than the group. Monitoring required careful engagement with everybody.

Mr Morden added that previously the housing might have belonged to one mining company, but with the merger of mining companies and cross-holdings, the expense of the housing might then have been claimed by a company that had not actually provided the housing. The intention was to incentivise the provision of housing benefits.

Mr Engel then reminded Members that the provision of housing could well become a fringe benefit to the employee, and so be liable to tax under another category.

Mr Mthethwa pointed out that on the mine compounds hostels were being converted to family units, and he asked for clarity as to which mine houses were being referred to. He added that many mines, together with their housing, whether this was in the form of hostels or other accommodation, were being closed and the mining shafts and the houses were simply left. Some housing was built so close to the actual mining operations that it was not fit for any other purpose, for health or safety reasons. He suggested that proper linking could assist all. He reminded the meeting that Carltonville and similar towns in the Free State were set up simply as mining towns.

Mr Momoniat
conceded that the issue was very complicated but gave the assurance that this question had been raised interdepartmentally and was being discussed.

The Chairperson agreed that the issues were complex. He was concerned about the cost of a shelf company, and felt that a balance should be struck. Many unemployed people, wanting to take advantage of the opportunities for empowerment offered by Broad Based Black Economic Empowerment (BBEEE), needed a company and would purchase a shelf company. A person purchasing one, who was then unsuccessful in his tender bid, would still have to bear the costs of the company and its annual costs, whilst still being without income. This aspect of enterprise development should be looked into. He felt that there was also a need to educate people about the costs involved in trust or warehouse companies owning residential property.

Mr Momoniat said that the National Treasury and SARS did already publicise the advantages or disadvantages of the mechanisms for holding residential property, but some property owners either ignored the information or thought it might change, or were indifferent until it was too late. Although companies and those who utilised the services of tax advisors might be cognisant of the situation, the ordinary man in the street tended not to concern himself with such matters. Tax law was not quite the same as other legislation.

The Chairperson felt that the private sector had not made a contribution to housing, nor was its role clear, and that the housing problem had been placed firmly on the State and the developmental agencies. He added that the mining houses should be encouraged to provide housing and the mechanism and the quality of accommodation provided were important.

Mr Momoniat said that the incentives, especially for mining houses were very important but were required to be in line with international standards; if not, then the mining companies would simply not participate or be active in South Africa. They were commercial entities, and existed to make a profit.

The Chairperson added that the costs of clogging up the system with shelf and mining exploration companies must be large. He considered that there must be large numbers of these companies, which should simply be deleted; it did not require tax experts to effect this.

Mr Engel responded that tax embraced innovative measures, an educational programme and the regulating paradigm, where incentives had to be in line with the advantages. In addition, there was international competition for investment and commercial activity. South Africa needed to offer regimes that were attractive to investors from other countries, such as United Arab Emirates, to persuade them to invest in South Africa. This requires constant work on definitions, since sometimes South Africa had a different interpretation of a phrase or a word from the definitions commonly used and adopted elsewhere in the commercial world. This work needed to be regular and ongoing. There were occasions when the English language was simply not precise enough. Above all regard must be had for the business reason for a decision or activity, and in this regard he directed the members to pages 28, 29 and 30 and the difficulties listed.

Ms Sibhidla asked how women married under customary law were affected by tax.

Mr Engel noted,
in respect of spousal deductions, that there were few statistics, although the Master’s Office held some that were not in an easily retainable format. He referred to page 32, and said that with regard to VAT and reorganisation, companies would sometimes make strange plans with the assets. Companies would be pursued aggressively if they were found to do this.

Dr George wished to know whether biometric registration was already under way.

Mr Tomasek added that biometrics were becoming more readily available for use in registering juristic entities, and this was expected to reduce malpractice, or fictitious and fraudulent companies. He noted that the remission of interest could lead to the collapse of the VAT chain, and could be done only in exceptional cases

The Chairperson suggested that the question of spousal deductions should apply between spouses, rather than being gender specific.

Mr Momoniat quipped that this did seem to be
discrimination against men.

Mr Tomasek said that multi spousal situations were only now becoming apparent and as yet there was no hard and fast approach.

Ms Sibhidla sketched the position where only one of the many spouses was an income earner. If that person died, she asked what would be the tax and legal position of the remaining spouses.

Mr Momoniat suggested that the will of the deceased should be the guiding principle.

The Chairperson said that there would appear to be problems, which could not be resolved at this meeting.

Mr Tomasek added that in respect of biometrics, SARS could only provide information to other departments if it was not confidential, such as identity numbers and dates of birth. SARS was precluded from supplying financial information.

Dr George asked about the “pay now argue later” principle, and whether there were statistics showing how many times SARS was incorrect. If so, he asked whether this process would have to change, if problems emerged.

Mr Tomasek responded that with regard to disputed claims, the taxpayer was entitled to put forward arguable cases, not frivolous or vexatious ones, and at the same time could request that payment be deferred until resolution of the case. This was done by a separate application, which was often omitted. He referred Members to the judgment set out on page 37 (see attached document), and pointed out that there was a majority and a minority view reported, but that litigants tended to rely only on the one that advanced their particular cause instead of making a submission that addressed both sides. He referred to page 39 of the document, dealing with liability of employers, and explained that provisional employees were listed in two levels – below and above R1 million earnings. For those under the R1 million limit there was an easier mechanical assessment based on the last assessments. For those in the category above R1 million the penalty was not automatic. Finally, in regard to customs and excise, he conceded that there were various issues that were receiving careful attention.

Dr George also reminded the presenters that during the last Parliament one of the DA members had asked about the special dispensation for those with disabilities. This aspect was not addressed in the documents placed before the meeting.

Mr Tomasek conceded that the question of disabilities had been left out but he reminded the meeting that this was an informal document and work was ongoing. The information including disabilities was being drafted, and was at about the stage of the sixth or seventh draft.

Ms Sibhidla asked for public participation on learner allowances and whether these could be extended to the banks.

Mr Momoniat said that changes with regard to learners were intended to make the system more learner- friendly and this went hand in hand with skills development. However, there was a need to avoid double benefits. In fact companies were only receiving back their portion of their contributions. This system could not be controlled too tightly, otherwise companies would simply not undertake any training.

Mr Engel added that allowances for films were still under consideration, but the difficulty was that the Hollywood film producers, in making South Africa a destination of choice for filmmaking, were taking advantage of the South African tax provisions to pay their biggest expenses, of the stars’ salaries, although little was actually being spent in South Africa. However efforts were being directed to devising a scheme whereby South Africa was a destination of choice for filming, but more benefits remained in South Africa.

The Chairperson summarised that not only was tax law complex, but was further clouded by people who were constantly trying to avoid paying tax. It was too complex to be left to the bureaucrats, and Parliament had a role in the formulation and evolution of tax policies, as it was a Parliament of the people. While equality was required, the prime task was to improve the quality of life of all. It was essential that whatever solutions were proposed would strike a balance and avoid adverse impact on the fiscus. It was not in the interests of Parliament to delay legislation.

The meeting was adjourned.


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